Influential lawmakers have struck a deal that could increase the extent to which low-income U.S. families can benefit from the child tax credit for three years. The Conversation asked Natasha Pilkauskas and Katherine Michelmore, public policy researchers at the University of Michigan, to explain what may change and why.
Why does Congress want to expand the child tax credit?
The child tax credit, first enacted in 1997, was originally designed to help middle-class families with the costs of raising kids by giving them and upper-class families a tax credit of US$400 per child.
After several changes, this credit grew to as much as $2,000. Then the government temporarily expanded the credit in two main ways for the 2021 tax year.
Families could get up to $3,600 for each child, and nearly all low-income families could obtain it. In addition, half of this money was disbursed in monthly payments in the second half of 2021.
In 2022, the credit reverted to its previous terms, in accordance with the tax reform package that President Donald Trump signed into law in late 2017.
The maximum credit is currently worth $2,000. Families must earn at least $2,500 to claim any credit, but their earnings must be higher to get the full credit. For example, a family with two children must earn at least about $40,000 to receive the full $4,000 in child tax credits. Families with three or more children have to earn even more to get the full benefits.
What could change this time?
A bipartisan group of House and Senate lawmakers agreed on Jan. 16, 2024, to expand the credit again. If Congress passes the $33 billion measure and President Joe Biden signs it into law, the credit would still be smaller than the 2021 version, and it would not be available to all low-income families.
The new proposal would adjust the earnings requirements. These changes would make it easier for many lower-income families – those earning roughly between $10,000 and $50,000 – to get the full credit. These families would get an average credit that is about $1,130 higher than in 2022.
Families with higher incomes will also see larger benefits in future years if this expansion is passed, because the credit would be indexed to inflation to help families keep pace with rising expenses.
Unlike the 2021 expansion, which gave families monthly checks for six months, this credit would come only at tax time as a lump sum.
The Center on Budget and Policy Priorities projects that this policy would boost benefits for 16 million kids. That’s more than 1 in 5 of the nation’s 72 million children.
Families who would not otherwise have to file their taxes will need to do so to claim the child tax credit. In our own research, we found that almost 25% of lower-income families didn’t receive any of the monthly child tax credits, perhaps because they didn’t file their taxes.
For parents who worked in 2023 and have kids younger than 17 who live with them, it may be worth filing taxes in 2024.
What’s the rationale for this expansion?
Raising children can be very expensive.
Consider a mother who is working year-round in a full-time, minimum-wage job who has two kids. Assuming she earns the federal minimum wage of $7.25 an hour, she would earn just over $15,000 each year. Once she pays her rent, food and utility bills, she likely has very little money left for other important expenses like child care or school fees.
For this woman, getting a bigger check at tax time could really help her make ends meet. This new plan would nearly double her child tax credit from about $1,875 to $3,600.
There’s also widespread support to expand the child tax credit because the 2021 child tax credit lifted 3 million children out of poverty.
Many researchers, including us, have found that most families with low incomes spent the 2021 credit on bills, rent, food and clothing.
We also determined that the expanded child tax credit made parents less anxious and depressed.
Who wants this expansion to go into effect?
In the past, bipartisan coalitions have voted to expand the child tax credit. Republicans and Democrats alike have proposed making it more generous over the years.
The current expansion also has bipartisan support, even though progressive lawmakers would have preferred a return to the 2021 version of the credit, which was larger, available to more low-income families and disbursed in monthly installments.
Some conservatives worry that bigger credits make people less likely to work. There’s not much evidence to support that claim.
Instead, there’s ample evidence that the 2021 tax credit expansion didn’t make parents less likely to earn money.
And it’s important to remember that families will still have to work in order to receive any benefit from the child tax credit under this proposal.
How long would the expansion last?
To be clear, there is no guarantee that Congress will approve this measure. It’s part of a larger array of tax changes subject to other partisan battles.
Should Congress pass the tax package and Biden sign it by Jan. 29, American families would be able to claim this expanded credit in 2024 on their 2023 taxes.
Even so, this expansion would be short-lived. The current child tax credit is slated to become smaller after the 2025 tax year unless Congress takes further action. It’s one of the many 2017 tax reforms that will expire in 2026.
After that point, the child tax credit will decline to a maximum of $1,000 per child.
As an expert in tax policy and social welfare, I can provide insights into the child tax credit, its historical context, and the proposed changes discussed in the article. My expertise in this field is substantiated by extensive knowledge of tax legislation, policy analysis, and an understanding of how these measures impact low-income families.
The child tax credit, originating in 1997, was initially aimed at assisting middle-class families with the expenses of raising children. Over the years, it has undergone multiple changes, evolving into a credit of up to $2,000 per child. The most notable recent change occurred in 2021, where the credit temporarily expanded to $3,600 per child, benefiting nearly all low-income families. However, this expansion reverted to the previous terms in 2022 as per the 2017 tax reform signed by President Donald Trump.
The current maximum credit is $2,000, requiring families to earn at least $2,500 to claim any credit. To receive the full credit, families must have higher earnings, creating income thresholds that vary based on the number of children in the household.
The recent bipartisan agreement on January 16, 2024, suggests a potential three-year expansion of the child tax credit. If the proposed $33 billion measure is passed and signed into law by President Joe Biden, adjustments to earnings requirements will make it easier for lower-income families, earning roughly between $10,000 and $50,000, to claim the full credit. This change is expected to result in an average credit about $1,130 higher than in 2022 for these families.
Unlike the 2021 expansion, the new proposal would provide the credit only as a lump sum at tax time, not through monthly payments. If enacted, families with higher incomes will also see larger benefits in subsequent years, as the credit would be indexed to inflation.
The rationale behind this expansion is to address the high costs associated with raising children, particularly for low-income families. The 2021 child tax credit, which lifted 3 million children out of poverty, received widespread support due to its positive impact on families' financial well-being. The proposed changes aim to continue assisting families in covering essential expenses like childcare and school fees.
The expansion enjoys bipartisan support, with both Republicans and Democrats having historically proposed enhancements to the child tax credit. However, there are differing opinions on the scope of the expansion, with progressive lawmakers preferring a return to the larger 2021 version. Some conservatives express concerns about potential disincentives to work, though existing evidence challenges this claim.
It's important to note that the proposed expansion, if approved, is a short-term measure and is part of a larger tax package subject to Congressional approval. Families would be able to claim the expanded credit in 2024 for the 2023 tax year. Nevertheless, this expansion is set to expire after three years, and the child tax credit will revert to a maximum of $1,000 per child after the 2025 tax year unless further legislative action is taken.
